Robert Engle - Measuring and Hedging Geopolitical Risk (November 3, 2021)

Some events can impact the volatilities of most assets, asset classes, sectors and countries, causing severe damage to investment portfolios. The magnitude of such shocks is defined as GEOVOL, which is a broad measure of geopolitical risk. Robert Engle and his colleagues have introduced a statistical formulation of such events as common volatility innovations in both a multivariate volatility context and an asset pricing context. In this lecture, Engle will show that volatility shocks are correlated across assets even after extracting common factors. To measure GEOVOL, they propose a parameterization and simple but novel estimation strategy that delivers the magnitude of GEOVOL and its factor loadings on assets and factors. Simulations verify the statistical performance of the estimator and test to detect GEOVOL. Two empirical examples show the power of the methodology and indicate the events that have had the biggest impact on financial markets. The results are useful for portfolio optimization and risk forecasting. More details: https://www.simonsfoundation.org/event/measuring-and-hedging-geopolitical-risk/

Added 9 Apr 2026